Published 6:30 am, Friday, November 21, 2008

Nabors F10 was one of 899 rigs still operating in Texas this week. Most are looking for natural gas.

Nabors F10 was one of 899 rigs still operating in Texas this week. Most are looking for natural gas.

Photo: BRETT COOMER, CHRONICLE

Oil under $50 could bring recession into Houston

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Call it a hangover from $150 oil.

After six years of growth, Texas' mighty oil and gas industry is bracing for what could be a sharp downturn in activity as falling commodity prices and the broader economic meltdown prod energy companies to cut back.

A stark reminder came Thursday, when crude fell below $50 a barrel for the first time since May 2005. Its closing price of $49.62 was down almost $100 from the record close of $145.29 on July 3. And weak global energy demands threaten to keep prices low.

The first signs of a pullback are just now showing, but the picture is expected to worsen in coming months as companies curtail spending on drilling programs, lay off workers and send less tax money to state coffers.

Amid the declines, Texas could lose what has been an important buffer against the effects of a faltering U.S. economy.

"A significant portion of that barrier, sort of the dam holding that recession back, has been the healthy condition of the oil and gas economy in Texas," said petroleum economist Karr Ingham in Amarillo. "All bets are off at this point as to how Texas weathers this storm."

Energy companies are reining in spending as plummeting prices make some projects unfeasible, and as tightening access to credit and capital markets hinder their ability to expand.

That's a sharp contrast to the go-go attitude of the last few years in Texas' oil patch, as rising oil and gas prices lured oil companies to pour billions into exploration, often in areas once thought too expensive to reach.

Yet no one is declaring the boom is over. Industry and government officials hope this is a temporary hiccup rather than the start of a protracted decline.

Nabors Industries, the world's largest onshore oil and natural gas driller, announced plans last month to curtail some capital spending. At the time, Chairman and Chief Executive Gene Isenberg expressed optimism about "a strong outlook for our business in spite of short-term volatility."

Marginal gas wells at risk

In Texas, most rigs are drilling for natural gas and operate on land, with a much smaller number working the Gulf of Mexico. Generally, the biggest clusters of activity are gas fields in East Texas and the Barnett Shale around Dallas-Fort Worth, and oil fields in the Permian Basin of West Texas.

Texas, where roughly half of U.S. rigs are working today, is likely to be hit hard by industry budget cuts that analysts predict will take 300 to 500 drilling rigs out of service nationwide.

Last week, the U.S. rig count fell by 51 to 1,941, according to the Nov. 14 weekly rig data report by Baker Hughes, an oil field services provider in Houston. Texas accounted for 23 of those lost rigs, leaving 899 still working in the state.

Anita Sparks, city secretary in Rankin, an oil town in West Texas with a population of 750, said lights on oil rigs still shine on the horizon at night, rental houses are full of oil workers and the local economy is good.

But she said the recent slide has gotten everyone's attention. "We're used to the ups and downs," she said. "You just hope that people are a little smarter this time around."

Analysts said areas that are the most costly to develop will be most vulnerable to rig losses.

In Texas, those include economically marginal oil properties in West Texas and deep, expensive gas wells in South Texas and offshore, said industry analyst Dan Pickering, of Tudor, Pickering, Holt & Co. Securities, a Houston investment bank. Core areas of the Barnett Shale and the emerging Haynesville Shale play in East Texas and northwestern Louisiana should hold up the best, he said.

Drilling decline likely

Texas Railroad Commissioner
Elizabeth Ames Jones
said that while the state is on track to issue 25,000 drilling permits — the most since 1985 — a decline in drilling activity is likely next year as producers postpone projects. "Even if it comes down to 19,000, we're still breaking records," she said, but noted that any decline will mean job losses and less revenue to the state.

The state collects what it calls severance taxes from energy companies based on the market price of oil and natural gas. In fiscal 2008, ending in August, those collections were $4.1 billion, up from $2.7 billion in 2007, according to the Texas Comptroller's Office. That total was the highest ever in nominal terms, but on an inflation-adjusted basis, collections were higher from 1981 to 1985.

If collections fall in 2009, which Jones expects, it will mean less money for two of the state's biggest public funds. One quarter of the collections go to a fund supporting Texas public schools, while 75 percent winds up in the state's general fund that supports public transportation, health care services and a host of other programs. There could also be less revenue for public universities, which receive oil and gas royalties from university-owned lands.

Diversification could help

About 226,000 Texans were employed in the state oil and gas industry during September, 8.7 percent more than at the same point in 2007, according to the
Texas Workforce Commission
.

Employment levels will be "under duress" for a little while until oil and gas companies can reduce costs, but should rebound once energy firms begin investing again, said Bill Herbert, industry analyst with Simmons & Co. International, an investment bank in Houston.

State officials and industry leaders like to say Texas' economy is not as dependent on oil and gas as it was in the 1970s and 1980s — when oil prices soared to highs only recently exceeded when adjusted for inflation, then crashed amid a prolonged energy downturn.

In 2007, the industry accounted for 15.7 percent, or $179 billion, of Texas' gross state product. That's up from 14.8 percent, or $158 billion, the year before. The industry hit a peak of 26 percent of gross state product in 1981.

"Texas has diversified away from oil and gas dependence since the bust of the 1980s," Pickering said, "but it is still meaningful."